Preannounced FY25 attributable net profit at Rmb1.7-1.9bn
　　Nine Dragons Paper (NDP) preannounced its FY25 earnings: Earnings rose about 165-190% YoY to Rmb2.1-2.3bn, while net profit attributable to shareholders increased about 126-153% YoY to Rmb1.7-1.9bn (excluding about Rmb400mn of perpetual bond interest). The preannounced results beat both our and the market’s expectations, mainly driven by lower-than-expected costs of self-produced pulp and a sharp YoY decline in coal prices.
　　Trends to watch
　　FY25 output and sales volume grew slightly; product mix shifted further toward high-end products. We estimate the firm’s papermaking sales volume rose 10% YoY to over 21mnt in FY25. The company focused on linerboard and corrugated board in the past, holding a market share of nearly 30% in 2024. In the recent years, it has expanded into pulp-based paper products, strengthened its raw material integration, and enhanced its industry chain presence. According to company announcements, it has been developing new production bases in Guangxi and Hubei during FY22-25, with capacity expansion centered on pulp and related papermaking.
　　In FY25, the firm commissioned production capacity for 1.2mnt of ivory board, 0.6mnt of P&W paper, 1.75mnt of chemical pulp, and 0.6mnt of chemi-mechanical pulp. As of FY25, we estimate its production capacity reached over 23mnt for paper and 5mnt for pulp (including recycled pulp), representing CAGRs of 8% and over 30% during 2021-2025. Looking ahead, the firm plans to add new capacity for 1.2mnt of ivory board, 0.7mnt of P&W paper, and 0.7mnt of chemi-mechanical pulp in 1HFY26, with total paper and pulp capacity expected to exceed 30mnt by end-2025. We expect its sales volume to maintain modest growth in FY26, with product mix further upgrading.
　　We attribute the positive earnings surprise to falling costs. In 1H25, ASPs across all paper segments trended downward due to weak supply and demand. According to RISI, linerboard, offset paper, and ivory board prices fell 4%, 9%, and 7% YoY over 1-6M25 to Rmb3,965/t, Rmb5,695/t, and Rmb4,560/t. We attribute the stronger-than-expected earnings to declining costs. First, cost savings from self-produced pulp notably exceeded expectations, particularly at the Beihai base in Guangxi, which　integrates pulp and paper production. Second, the sharp YoY decline in thermal coal prices boosted profitability across paper grades. Looking ahead, we expect coal prices to recover HoH in 2H25, narrowing the firm’s energy cost advantage. We recommend monitoring potential earnings upside from changes in self-produced pulp costs and seasonal price increases in certain paper products.
　　FY26 capex likely to decline but remain elevated; watch potential changes in gearing ratio. The firm’s capex has spiked since FY22. It preannounced FY25 capex of over Rmb13bn and expects to complete construction of existing production facilities in 1HFY26. However, given its flexible capacity planning and higher-than-expected cost savings from self- produced pulp, we recommend monitoring the firm’s capacity expansion plans. We expect capex to remain relatively high in FY26 and suggest keeping an eye on its gearing ratio.
　　Financials and valuation
　　Considering the firm’s higher-than-expected cost savings from self- produced pulp, we raise our FY25-26 earnings forecasts by 25% and 49% to Rmb1.8bn and Rmb2.5bn and introduce our FY27 earnings forecast of Rmb2.5bn. The stock is trading at 0.5x, 0.4x, and 0.4x P/B. We maintain our OUTPERFORM rating and raise our TP by 33% to HK$6.0, implying 0.5x, 0.5x, and 0.5x P/B, offering 11% upside.
　　Risks
　　Disappointing demand; sharper-than-expected pulp price volatility; higher- than-expected new supply; adjustments to perpetual bonds and elevated gearing ratio.